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Political Risk Moderates

Aon’s 2013 risk map shows an increase in countries where political risk is lower, but problems may be lurking in supply chains.

Global political risk has moderated as emerging economies stabilize in the wake of the Arab Spring and pressures related to the financial crisis abate, according to Aon Risk Solutions’ latest mapping of such risk.

On Aon’s political risk map for 2013, 13 countries were upgraded to show they pose less political risk, while 12 were downgraded to show they pose a higher risk. While that nearly even split between upgrades and downgrades may not sound encouraging, it represents a big improvement over 2012, when just three countries were upgraded and 21 were downgraded, and 2011, when 11 upgrades were outpaced by 19 downgrades.

“The overall situation has been improving,” said Roger Schwartz, senior vice president of political risk for Aon Risk Solutions, noting that the ripple effects of the Arab Spring uprisings in 2011 have been subsiding. “The political violence has eased in some areas, and the economics have eased in some areas but not in others.”

The upgrades of a few countries in Central Asia and the Caucasus region, including Azerbaijan and Armenia, and cited efforts in emerging Europe and the Commonwealth of Independent States to put in place structural reforms, according to Aon. In the Middle East, where a number of nations were downgraded in 2012, Bahrain, Oman and UAE were upgraded this year. Countries in Northern and Western Africa remain under pressure, with Algeria, Cameron, Chad and Mali downgraded on this year’s map.

Aon Risk Solutions’ map focuses on the developing world and excludes members of the eurozone and the Organization for Economic Cooperation and Development. This year’s map was developed in partnership with Roubini Global Economics and includes input from Lloyd’s syndicates and insurers that write political risk insurance.

The political risk map assesses six areas of risk for each country: exchange transfer, legal and regulatory, political interference, political interference, political violence, sovereign nonpayment and supply chain disruption.

This year’s generally upbeat message was qualified by a big uptick in the number of countries tagged with supply chain risk, with that characterization added to 47 countries and territories, while just eight countries showed an improvement in supply chain risk, including Brazil, China, India and Panama.

Schwartz noted that many of the countries that had the supply chain risk icon added this year are in Africa and the Middle East, regions that are politically stressed. “A lot of these supply chain issues are relating to the ability to get product in or out of the country,” he said.

A recent Deloitte survey suggests that supply chain risks are increasing in developed economies as well. The survey of 600 executives at retail and manufacturing companies worldwide showed 48% are seeing risk events crop up in their supply chain more frequently over the past three years, and 53% said supply chain risk events are more costly than they were three years ago.

Kelly Marchese, a principal in the supply chain strategy practice at Deloitte Consulting, linked the increase in supply chain problems to the fact that companies’ supply chains have become more complex and more likely to span the globe. “This problem isn’t going to go away, it’s only going to get tougher to manage a supply chain. As complicated as our supply chains have gotten, we have to get more sophisticated about how we manage the risk,” Marchese said.

The mention of supply chain interruptions may bring to mind the 2011 tsunami in Japan or the flooding that same year in Thailand, but many of the executives surveyed by Deloitte said the problems that carried the biggest price tag occurred closer to home. Forty percent indicated the most costly problems in their supply chains occurred in North America, while 34% cited the cost of problems in Northern and Western Europe and another 34% pointed to China.

While floods or hurricanes make headlines, other risks relate to individual companies and the decisions they make regarding their supply chains,” Marchese said. “Some of the things that affect companies are almost self-inflicted. They’ve made decisions over time because of cost-cutting without looking at the total risk involved.”

More than half (54%) of the executives surveyed said margin erosion was the most costly type of supply chain problem they encountered, while 40% cited sudden changes in demand.

According to the survey, 63% of companies have a supply chain risk management program. But executives were skeptical about those efforts, with only 55% describing risk management for the supply chain as extremely or very effective.

The biggest challenge that executives saw in controlling supply chain risks was cross-functional collaboration, which was cited by almost a third (32%).

Companies with supply chains that reach across countries and regions may have managers in charge of a certain region or a certain program, said Marchese, who's pictured at left. “Until you get up to the CEO or COO, there’s no one person who owns the whole thing. That’s one of the things that makes supply chain risk so hard to manage.”

“Having the governance in place that spans the entire supply chain is incredibly important to insure risk management decisions are being made end-to-end or sourcing departments aren’t making lowest-cost decisions in a vacuum without realizing the decisions,” she added.

The cost of risk management efforts was the secondecond most frequently cited challenge was the cost of risk management efforts, cited by 27%.

Marchese argued that companies can work to ensure their supply chains are resilient without necessarily spending a lot of money, and cited the hypothetical case of a company that has a factory in Brazil manufacturing products for Latin America and another in the U.S. making products for North America.

“If something happens in the U.S., how easy would it be for you to produce those things in Brazil and then ship them?” she asked, and suggested the company could ensure that that’s possible in case the U.S. factory suffered damage. “It has to do with who your suppliers are, how your facilities are set up, whether you have the right tooling or regulatory permits. It doesn’t have to be expensive but it does take planning.”

Developing a metric for supply chain resiliency would aid risk management efforts, since executives who are measured on costs will focus on cutting costs, according Marchese. “If companies start to look at a measure of resiliency and shareholders hold companies responsible, then we’ll see decisions being made differently,” she said.

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